# [1972] 1 S.C.R. 241

- **Citation:** [1972] 1 S.C.R. 241
- **Court:** Supreme Court of India
- **Decided:** 1972
- **Case number:** Civil Appeals Nos. 1254 of 1966
- **Bench:** G. K. Mitter, P. Jaganmohan Reddy
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/1972-1-s-c-r-241-5350
- **Pages:** 25

## Headnote

Industrial Dispute-Bonus-Available surplus-Full Bench
formula-Documents filed before Industrial Tribunal whether
require formal proof-Depreciation for double shift-Allowances for income-tax, computation of-Return on working
capital-Amounts required for rehabilitation-Contingency
and Development reserves-Financial capacity.
The appellant was an electricity supply company. The dispute
between the appellant and its workmen relating to the bonus payable
for the year 1960-61 was referred to the Industrial Tribunal. The case
of the appellant was that after allowing for prior charges no available
surplus was left for the payment of bonus. The Tribunal however,
computed the
available surplus at Rs. 1,29,248 and out of this
awarded three months' bonus amounting to Rs. 730,00 to the workmen.
In appeal to this court it was contended on behalf of the appellant that
the Tribun~l was in error in disallowing (a) depreciation on account
of double shift, (b) income-tax,
(c) return on working capital,
(d) amounts required for rehabilitation, (e) contingency reserve and
(f) development reserve, the latter two of which were statutory reserves
which the undertaking had to provide under the schedule to the Electricity Supply Act 1948.
Inter alia the appellant contended that
since the Evidence Act as a whole was not applicable to industrial proceedings certain documents such as balance sheet should have been
accepted by the Tribunal without formal proof.
HELD: (i) In earlier cases decided by this Court in which the Fuli
Bench formula of the Labour Appellate Tribunal had been considered
by this Court with reference to Electricity Undertakings and other wise,
the following principles were laid down for the purpose of working
out the available surplus: (I) first gross profits have to be ascertained and
for that purpose balance-sheet and the profit and loss account as required
under the Companies Act have to be looked into. If the entries are
contested they have to be proved like any other contested fact; (2) The
relevant year for which bonus is claimed is a self sufficient unit and the
ap{lropriate accounts have to be made on the notional basis in respect
of ihe said year: (3) The ascertainment of depreciation is according to
the Income-tax Act and what is allowed as a prior charge is the annual
noiional normal depreciation and not the actual depreciation which
is in fact allowed.
Apart from the notional normal depreciation the
depreciation allowable under Tncome-tax Act for multiple shift is also
allowable; (4) In calculating the income·tax for deduction as a prior
charge it is not the notional normal depreciation alone that has to be
deducted but the statutory depreciation namely the concessions given
under the Income-tax Act to the employers which would include the
depreciation for multiple shifts, if any, and thereafter the income-tax
242
SUPREME COURT REPORTS
[1972] l S.C.R.
will have to be calculated; (5) Return on paid up capital allowable for
deduction from the gross profits is 6 ~-0
; a slightly higher percentage
may be allowed in risk undertakings like plantation>;
(b) In regard
to return on working capital, if it is shown that the reserves were available
and were actually used as working capital, whether the reserves utilised
were depreciation reserves or any other, a return from 2 % to 4 % is
allowable according to the industry, taking into consideration any special
circumstances which may justify a claim for a higher interest; (7) Rehabilitation reserve has to be provided for in order to keep the original
capital of the business intact. It is necessary in the interest of labour
as well as capital to provide for depreciation of the assets yearly and also
to provide for rise of prices.
For the determination of this reservo it
is suggested that the undertaking be first divided into blocks such
as 'plant and machinery' on the one hand and other assets like Road,
Buildings, Railways sidings etc. on the other.
Then the cost of these
separate bl

## Text

_Characters 0–39,745 of 60,244. This is a partial read: ask again with offset=39745 for what follows._

241
A
BAREILLY ELECTRICITY SUPPLY CO. LTD.
B
c
D
E
F
G
H
v.
THE WORKMEN & ORS.
August ~6, 1971
[G. K. MITTER AND P. JAGANMOHAN REDDY, JJ)
Industrial Dispute-Bonus-Available surplus-Full Bench
formula-Documents filed before Industrial Tribunal whether
require formal proof-Depreciation for double shift-Allowances for income-tax, computation of-Return on working
capital-Amounts required for rehabilitation-Contingency
and Development reserves-Financial capacity.
The appellant was an electricity supply company. The dispute
between the appellant and its workmen relating to the bonus payable
for the year 1960-61 was referred to the Industrial Tribunal. The case
of the appellant was that after allowing for prior charges no available
surplus was left for the payment of bonus. The Tribunal however,
computed the
available surplus at Rs. 1,29,248 and out of this
awarded three months' bonus amounting to Rs. 730,00 to the workmen.
In appeal to this court it was contended on behalf of the appellant that
the Tribun~l was in error in disallowing (a) depreciation on account
of double shift, (b) income-tax,
(c) return on working capital,
(d) amounts required for rehabilitation, (e) contingency reserve and
(f) development reserve, the latter two of which were statutory reserves
which the undertaking had to provide under the schedule to the Electricity Supply Act 1948.
Inter alia the appellant contended that
since the Evidence Act as a whole was not applicable to industrial proceedings certain documents such as balance sheet should have been
accepted by the Tribunal without formal proof.
HELD: (i) In earlier cases decided by this Court in which the Fuli
Bench formula of the Labour Appellate Tribunal had been considered
by this Court with reference to Electricity Undertakings and other wise,
the following principles were laid down for the purpose of working
out the available surplus: (I) first gross profits have to be ascertained and
for that purpose balance-sheet and the profit and loss account as required
under the Companies Act have to be looked into. If the entries are
contested they have to be proved like any other contested fact; (2) The
relevant year for which bonus is claimed is a self sufficient unit and the
ap{lropriate accounts have to be made on the notional basis in respect
of ihe said year: (3) The ascertainment of depreciation is according to
the Income-tax Act and what is allowed as a prior charge is the annual
noiional normal depreciation and not the actual depreciation which
is in fact allowed.
Apart from the notional normal depreciation the
depreciation allowable under Tncome-tax Act for multiple shift is also
allowable; (4) In calculating the income·tax for deduction as a prior
charge it is not the notional normal depreciation alone that has to be
deducted but the statutory depreciation namely the concessions given
under the Income-tax Act to the employers which would include the
depreciation for multiple shifts, if any, and thereafter the income-tax
242
SUPREME COURT REPORTS
[1972] l S.C.R.
will have to be calculated; (5) Return on paid up capital allowable for
deduction from the gross profits is 6 ~-0
; a slightly higher percentage
may be allowed in risk undertakings like plantation>;
(b) In regard
to return on working capital, if it is shown that the reserves were available
and were actually used as working capital, whether the reserves utilised
were depreciation reserves or any other, a return from 2 % to 4 % is
allowable according to the industry, taking into consideration any special
circumstances which may justify a claim for a higher interest; (7) Rehabilitation reserve has to be provided for in order to keep the original
capital of the business intact. It is necessary in the interest of labour
as well as capital to provide for depreciation of the assets yearly and also
to provide for rise of prices.
For the determination of this reservo it
is suggested that the undertaking be first divided into blocks such
as 'plant and machinery' on the one hand and other assets like Road,
Buildings, Railways sidings etc. on the other.
Then the cost of these
separate blocks has to be ascertained and their probable
future life
has to be estimated. Once this estimate is made it becomes possible
to anticipate approximately the year when the plant or machinery will
require replacement; and it is the probable price of such replacement
on a.future date that decides the amount to which the employer is entitled
by way of replacement cost. The claim for rehabilitation includes
the claim
for
replacements and modernization.
The probable
cost is reached by adopting a multiplier based on the ratio between the
cost price of the plant and machinery and the probable price which may
have to be paid for its rehabilitation, replacement or modernisation.
After ascertaining the multiplier, a divisor has to be adopted in respect
A
B
c
D
of each block in order to ascertain the annual requirement
of the
employer in that behalf year after
year; (8) In Mathura Parshad
Srivastava's case
the claim for cootingency reserve and development
E
which have to be provided under the Electricity (Supply) Act was upheld
though these do not constitute prior charges like items (3), (4), (5), (6)
and (7) above. The Tribunal cannot fix such a high figure of bonus as
to ·]eave insufficient funds in the hands of the company an'1 make it
difficult to provide for these two statutory reserves. Various- factors
including the financial capacily of the undertakir" to pay, have to be
taken into accoun_t in fixing bonus. [251 C.-254 G)
Mill Owners Association, Bombay v. The Rashtriya Mazdoor Sa;,'iJ,.
Bombay & Anr., [1950] L.L.J. 1247. Muir Mills Co. Ltd., v. Suti Mill
Mazdoor Union, Kanpur,
[1951] I S.C.R. 991, U.P. Electricity Supplr
Co. Ltd., v. Their Workmen, (1952) 2 L.L.J. 431, Shree Meenakshi Mills
Ltd. v. Their Workmen, (1968] S.C.R. 878, Tinave//y-Tuticorn Electric
Supply Co. Ltd .. v. Their
Workmen. [1960], 3 S.C.R. 68 Ahmedabad
Miscellaneous Industrial Workers Union v. Ahmedabad Electricity Co.
Ltd., [1962] 2 S.C.R. 934. Associated Cement Companies Ltd., v. Its
Workmen, [1959] S.C.R. 925 Surat Electricity Co. Ltd., Staff Union v.
Surat Electricity Co. Ltd., [I 957] 2 L.L.J. 648, Hamdard Dawakhana Wakf
v. Its Workmen & Ors., [1962] 2 L.L.J. 772, Workmen v. Hindustan
Motors Ltd., [1968] 2 S.C.R. 311
and Mathura Parshad Srivastava
v. Sagour Electric Supply Co. [1966] 2 L.L.J. 307, referred to.
(ii) Even if all the technicalities of the Evidence Act are not strictly
applicable except so far as Section 11 of the Industrial Disputes Act
!947 and the rules prescribed therein permit it, it is inconceivable that
F
G
H
A
B
c
D
E
F
G
H
BAREILLY ELEC. co. v. WORKMEN (Jaganmohan Reddy, J.) 243
the Tribunal can act on what is not evidence such as hearsay, nor can
it justify the Tribunal in basing its award on copies of documents when
the originals which are in existence are not produced and proved by one
of the methods either by affidavit or by witnesses who have executed
them, if they are alive and can be produced.
Again if a party wants
an inspection it is incumbent on the Tribunal to give inspection in so
far as that is relevant to the enquiry. [259-D F]
The application of the principle of natural
justice ooes not
imply that what is not evidence can be acted upon. On the other hand
what it means is that no materials can be relied upon to establish a
contested fact which are not spoken to by persons who are competent
to speak about them and are subjected to cross-examination by the
party against whom they are sought to be used. [258 HJ
When the appellant in the present case produced the balance sheet
and profit and loss account of the company, it did not by its mere production amount to proof of it o~ of_ the truth of the entries therein.
rr these entries are challenged the appellant must prove each of such
entries by producing the books and speaking from the
entries made
therein.
Tf a letter .or other document is produced to establish some
fact which is relevant to the enquiry the writer must be produced or
his affidavit in respect thereof be filed and opportunity given to the
opposite party who challenges this fact. [259 B-D]
Indian Hume Pipe Co. Ltd., v. Their Workmen, [1959] 2 L.L.J. 357
Khandesh Spinning and Wvg. Mills Co. Ltd., v. The Rashtriya Girni Kamgar
Sangh, Jalgaon, [1960], 2 S.C.R. 841, Anil Starch Products Ltd., v. Ahmedabad Chemical Workers Union Civil Appeal No. 684of1957, Pet/ad Turkey
Red Dye Works Ltd., v. Dyes and Chemicals Workers Union,
Pet/ad,
[1960] 2 S.C.R. 906, Management of Trichinopo/y Mills Ltd. v. National
Cotton Textiles Mills Workers Union; Civil Appeal No. 309 of 1957,
Bm.~al Kagazkal Mazdoor Union v. Titaglwr Paper Mills Co. Ltd., [1964]
3 S.C.R. 38 and Union of India v. Verma, [1958] 2 L.L.J. 259, referred to.
(iii) In view of the unsatisfactory oral and documentary evidence
the Tribunal was justified in rejecting the claim for depreciation on the
basis of double shift. It could not be assumed that in an Electric
Underta)<ing the boilers and turbines must be working. throughout,
at any rate more that 8 hours. In view of disallowance the amount to
be allowed as prior charge towards depreciation will have to be computed
after allowing for the notional depc·eciation. [260 F, 26lB]
(iv) The computation of income-tax by the Tribunal after deducting
the statutory depreciation was in accordance with the decisions of this
Court and could not be assailed. [262 C-D]
Burn and Co. Ltd., v. Its Workmen, [1954] 5 S.C.R. 82 referred to.
.
(v) In consideri~g a. claim for return on working capital two queshons must be kept In view; whether the reserve were available and if
~hey were, whether they were used as working capital and if so, what
TS the amount. These are questions of fact and if the employer fails to
establish by satisfactory evidence the claim will have to be rejected.
244
SUPREME COURT REPORTS
[1972] 1 S.C.R.
In this case there was no proof that any of the reserves had been utilised.
The claim in this respect was therefore rightly rejected by the Tribunal.
[263 D-E]
(vi) The letters filed by the appellant in support of the replacement
cost had not been proved by any of the persons who wrote them or any
of the representatives of the firms whose letters they were. There was
no oral evidence of the precise requirement for rehabilitation. The
Tribunal was justified in holding that the appellant had failed to prove
the original cost of the machines, plant and machinery, its age, the probable requirement for replacement, the multiplier and the divisor.
In
these circumstances this claim also had been properly disallowed.
[264 C-G]
(vii) The provision for contingency reserve and development reserve
has been made under the Electricity (Supply) Act for a special purpose,
namely to work out the charges to be recovered from the consumers for
the supply of Electricity but that does not mean that these are not to be
taken into consideration in 'declaring bonus though they have not been
treated as prior charges. In these circumstances the amount of Rs.
55,233 had to be provided for. Except for this amount the computation
made by the Tribunal for ascertaining the available surplus was justified.
[265C-D]
(viii) The available surplus found by the Tribunal was Rs. 1,29,248.
If Rs. 55,233 is to be provided for contingency reserve and development
reserve there will be available surplus of Rs. 74,015. The Tribunal
awarded three months bonus amount to Rs. 73,000 which works to Rs.
24,333 per month. Having regard to the financial capacity of this Undertaking one month's bonus which will leave a surplus for the working
of the Undertakings will meet the ends of justice. [265 E-F]
CIVIL APPELLATE JURISDICTION : Civil Appeals Nos.
1254 of 1966.
Appeal by special leave from the Award dated November 15, 1965 of the Industrial Tribunal (III), Allahabad in
Adjudication Case No. 10 of 1962.
G. B. Pai and H. K. Puri, for the appellant.
J. P. Goyal and M. V. Goswami, for respondent No. 1.
P. N. Tiwari, for respondent No. 2.
The Judgment of the Court was delivered by
P. Jaganmohan Reddy J.-The Appellant
is
an
Electricity Supply Co., and in this Appeal by Special Leave
challenges the Award made against it, by the Industrial
Tribunal (III) at Allahabad on 15th November 1965.
The dispute between the Appellant and its Workmen is
one relating to the bonus payable for the year 1960-61.
As an amicable settlement could not be arrived at, the
A
B
c
D
E
G
H
, A
B
BAREILLY ELEC. co. v. WORKMEN (Jaganmohan Redd;y, J.) 24S
State of U. P. by its order dated 24-1-1962 referred the
following dispute for adjudication to the Tribunal:
"Should the employers be required to pay bonus
to their workmen for the· year 1960-61? If so, at
what rate and with what details ?"
The case of the Appellant was that after allowing for prior
charges no available SlJrplus was left for the payment of
bonus to workmen. According to the Company a gross
profit of Rs.
6,06,684/- was earned for the year ending
31st March, 1961, but the Tribunal added to it a sum of
c Rs. 9,949/- as representing extraneous income and consequently computed the gross profit at Rs. 6,16,633/-. The
following prior charges were claimed by the Appellant and
we have indicated as against each one of these in the opposite
columns wh3t the Tribunal has awarded and disallowed:-
D
- __ ...:...._
Expenses as per profit and
loss account:
Amount
claimed by
the Appell,
ant
Rs.
1,32,156
A1nount
a]Jtl\VCd by
the T_ribunak
Rs.
1,32,156
E
Depreciation:
F
G
Normal
Double shift.
Incon1e Tax
.
Rs.
2,02,814
28,413
2,31,227
Contingency Reserve
Development Reserve
Return on share capital
Return on working capital
Rehabilitation requirement
Total
2,31,227
1,09,485
32,900
22,333
48,000
60,540
15,66,497
22,03,138
Notional normal:
Double shift:
2,02,814
Nt\.
1,04,415
Nil.
Nil.
48,00(}
Nil.
Nil.
4.87,385
·----------·------ -----
After making the necessary allowance as aforesaid towards deductions claimed as prior charges from the gross
profit (Rs. 6,16,633/- minus Rs. 4,87,385/-) the Tribunal
computed the available surplus at Rs. 1,29,248/-.. Out of
this amount of available surplus three months bonus
H which amounts to Rs. 73,000/- was awarded as bonus
leaving sufficient funds for the Company to run its undertaking.
246
SUPREME COURT REPORTS
[1972] 1 S.C.R.
On behalf of the Appellant it is contended that the
A
Tribunal was
in error in disallowing depreciation on
account of (a) double shift, (b) Incometax, (c) return on
working capital, (d) amounts required for rehabilitation,
( e) contingency reserve and (f) development reserve, the
latter two of which were statutory reserves which ihe ul!der8
taking had to provide for, under the schedule to the Electricity (Supply) Act.
The reasons given by the Tribunal for disallowing the
double shift depreciation was that the Company did not c
produce any documents to show the total running hours
of each boiler or turbine, that in any case the evidence
relating to the running of each of the boilers and turbines
does not justify the claim for depreciation for the double
shift on the entire plant and machinery; that the Company
could only claim double shift allowance with regard to
D
certain specified machinery and that in the previous years
it had not claimed double shift allowance nor did it
claim any deductions before the Incometax authorities for
the year in question.
For these reasons it held that the
Appellant was not entitled to claim the double shift depreciation during the year in dispute. The contingency reserve
E
and the development reserve were disallowed as in the view
of the Tribunal they were not a charge on the profits. The
rehabilitation requirements were rejected on the grol!lrd
that the Company had failed to prove the original cost of
the plant and machinery; that it had failed to show the
actual amount spent on rehabilitation of plant and machiF
nery either in the year in dispute or in any subsequent year;
that no rehabilitation allowance was claimed in the previous
year; that the cost of the assets of the Company had not been
duly proved as engineers were not called and that the quotations produced by the Company could not be relied upon.
The return on working capital was disallowed on two
G
grounds; namely that the calculation
of the working
capital has been made on the basis of the assets and rehabilitation as they stood on the closing day of the year 1960-6 t
namely on 31-3-61 which is a mistake because whatever may
have been the assets and liabilities at the end of the year they
H
would not be the same at the beginning of the year nor
could they be applied as the working capital. The second
ground is that on the evidence it cannot be established that
BARE!LLY ELEC. co. v. WORKMEN (Jag(lnmohan Reddy, I.) 247
A any reserves were utilised as working capital, nor was there
any necessity to do so.
__)
Before us the learned Advocate of the Appellant has
urged that the Tribunal was not justified in rejecting the
B
material placed before it, from which the several deductions
claimed by it ought to have been allowed in computing the
available surplus. It will be convenient to deal with each of
the items separately but before doing so we wi£h to set out
several factors and certain essential features which have to be
taken into consideration in claims made by workmen for
•
bonus. The basic assumption which has been accepted
c by this Court approving the first and second Full Benches
of the Labour Appellate Tribunal is that the award of
bonus is not by way of an ex-gratia payment but in furtherance of social justice the claim of capital and labour which
contribute to the earnings of the industrialconcern, make
D
it equitable to grant labour the benefit of their efforts if
there is a surplus. The first fu!l Bench in the Mill Owners
Association, Bombay v.
The Rashtriya Mazdoor Sangh,
Bombay and Anr.(1), had laid down a general
formula
applicable for determining the available suprplus of an
Industrial undertaking for the purposes of awarding bonus
E
to its workmen. The first step in this
regard is the
ascertainment of the gross profits of a concern, which are
arrived at after payment of wages and dearness allowances
to the employees and other items of expenditure.
The next
F
step is to ascertain what are the prior charges which have to
be deducted from the gross profits in order to arrive at
the available surplus.
The Full Bench formula concerns the claim of capital
~
to prior charges which have to be taken into account to give
t
a fair return to the investor and also to keep the industry
working efficiently which in the long run will enure to
G the benefit of Jabour. The items considered as prior
'
charges are : (1) fair return on-(a) paid up capital; (b)
working capital; (c) reserves utilised as working capital
which obviates the necessity to borrow at higher rates of
1
interest. (2) Amount of money reJ.uired for replacements
rehabilitation and modernization o machinery. (3) DeH .preciation allowed by the Incometax authorities being only
'!
a percentage of the Written down value, the fund set apart'
..
(1) [1950] L.L.J. 1247.·
•
l7-M1245.Sup. CI/71
248
SUPREME COURT REPORTS
[1971] 3 S.C.R.
A
yearly for depreciation and designated under that head
would not be sufficient for thse purposes,
so an extra
amount would have to be annually set apart under the
heading reserves to make up the deficit. The question
what is the ratio of the available surplus which could be
awarded as a bonus was also considered. The Full Bench
8
felt that the answer was not an easy one, but essentially
the quantum of bonus must depend upon the relative
prosperity of the concern during the year under review which
is reflected in the amount of surplus; the needs of labour at
existing wages is also a consideration of importance. It
observed in para 37:
c
" ........ but we should make it plain that these
are not necessarily the only considerations; for
instance no scheme of allocation of bonus could be
completed if the amount of which bonus is to be paid
is unrelated to the employees' efforts; and even
D
when we have mentioned all these considerations
we must not be deemed to have exhausted the subject".
This Court in Muir Mills Co. Ltd. v Suti Mill
$
Mazdoor Union, Kanpur(1), generally accepted as sound the
E
view of the Full Bench, that since labour and capital both
contribute to the earnings they should derive benefit, if
there is a surplus after meeting the four prior or necessary
charges specified in the formula. However, neither the
priority as between the four prior charges and their relative
acceptance nor the conditions upon which they were allowed
F
was examined by this Court, but it was nevertheless held
that bonus is neither a gratuity nor gift nor can it be regarded
as deferred payment. The principles enunciated by the First
~
Full Bench had been approved in U. P. Electricity Supply
Co. Ltd. v. Their Workmen(2) as being also applicable to
G
· Electricity Undertakings.
It was pointed out that in
determining the available surplus it is not the profits that
have to be determined as required under the Electricity
(Supply) Act 54 of 1948, which had to be considered but the
gross profits as computed from the balance sheet and
profit and loss account to be prepared under the Companies
H
'
Act, subject to scruitiny if challenged. The reason for
(1) [1955] (I) S.C.R. 991.
(2) [l952J(2) L.L.J. 431.
BAREILLY ELEC. co. v. WORKMEN (Jaganmohan Redd,v, /.) 249
A non-applicaoility of the Electric (Supply) Act according
to this Full Bench was that the object of the Act being to
reduce the price of electricity which was affected by fixing a
maximum above which the profits of the concern shall not
rise, the formula of the first Full Bench which was intended
8 to do social justice was at variance with the purpose which
the Electricity (Supply) Act was intended. to subserve.
The Tribunal said at page 438:
Ii
"There is therefore no basis oe1ween the two for
,my convergence on the point of bonus as now understood; it is not permissible to inject the Full Bench
c
items into the Electricity (Supply) Act and on the other
hand the accounting under the Electricity (Supply)_Act
is at variance with normal commercial practice under
the Companies Act and with the basis of our Full
Bench decision. In the result we have come to the
conclusion that our Full Bench decision must be
D
applied as a whole for the ascertainment of bonus of
these concerns. This, however, does not preclude
consideration of the suggestions for clarification and
modification ..•......... "
This decision was approved by this Court in Shree
Meenakshi Mills Ltd. v. Their Workmen(1) but that was
E not a case dealing with an Electricity undertaking. The
case which dealt directly with an Electricity
Undertaking
was Tinavelly-Tuticorn Electric Supply
Co. Ltd. (also
referred to as T. T. E. Supply Co.) v. Their Workmen.(2)
In this case also this Court held that the Full Bench formula
was applicable to electrical undertakings and to the formula
F relating to the statutory depreciation except for additional
and initial depreciation-though there was nothing in it
which would indicate whether the depreciation deductible
was according to the Electricity (Supply) Act or the Incometax Act. There is however, no doubt that in the U. P.
G Electricity case the Full Bench did in fact apply the
Incometax
Rules
for
ascertaining
depreciation. In.
Ahmedabad Miscellaneous Industrial Workers Union v.
Ahmedabad1Electricity Co. Ltd.(3) the Full Bench formula
applying the Incometax Act rules to ascertain depreciation
as a prior c1'arge was approved. It was also observed that
H it was not open to the Appellant to raise the question that
(1) [1958] S.C.R. 878.
(2) [1960] (3) S.C.R. 68.
3 [1962] 2 S.C.R. 934.
250
SUPREME COURT REPORTS
(1972] 1 S.C.R.
the provisions of the seventh schedule to the Electricity
A
(Supply) Act should be applied for purposes of calculating
depreciation in preference to the incometax rules in working
out the Full Bench formula.
Even on the assumption that
the question was still open, because as Wanchoo, J.,
observed "it was never directly raised in this Court and
specifically decided" they were of opinion that the Income8
tax rules should be applied in preference to the provisions of
the Seventh Schedule to the Electricity (Supply) Act.
The
reasons for arriving at that conclusion are given at pages
939-941.
In
Associated Cement
Companies Ltd. .v.
Its
Workmen(1),
Gajendragadker, J., (as he then was) c
said at page 944 with reference to Muir Mills Company
case that:
"neither the propriety nor the order of the
priority as between the four prior charges and their
relative importance nor their content was examined by
this Court in that case; and though the formula has
subsequently been generally accepted by this Court
in several reported decisions ...... the question about
the adequacy, priopriety or validity of its provisions
has not been examined nor had the general problem
as to whether the formula needs any variation, change
or addition been argued and considered. It is for the
first time since 1950 that in the present appeals, we are
called upon to ex'lmine the formula carefully and
express our decision on the merits of its specific provisions."
D
E
F
Having examined the several aspects of the formula in great
detail and if we may say so with respect with some thorough·
ness the various matters dealt with by the two Tribunals in
respect of the prior charges relating to depreciation, incometax; fair return on capital, fair return on reserves utilised
as working capital and any amount required in excess
G
of the depreciation for the purpose of rehabilitation, re·
placement and modernization of machinery, the formula
evalved therein has been approved. In the application of
the formula for determining the available surplus, the
balance sheet and profit and loss account of an undertaking
are important documents. At any rate ·the proof of the u
various prior charges has to be given, after affording an
(I) 1959 S.C.R. 925,
r
BAREILLY ELEC. co. v. WORKMEN (Jaganmohan Redd,v, J.) 251
A opportunity to the workmen, if need be, by the cross -examination to contest it.
The formula of the Full Bench both in the Textil case
and its application to the Electricity
Undertakings as
B held in the U. P. Electricity case has now been accepted
by this Court in several cases with further clarification and
elucidation. We
can therefore deduce the following
principles for ascertainment of the available surplus in
respect of an Industrial undertaking and/ or an Electricity
c
D
E
F
G
H
Undertaking:
(I) First gross profits have to be ascertained and
for that purpose the balance-sheet and the profit and
loss account as required under the Companies Act
has to be looked into. If the entries are contested then
they have to be proved like any other contested fact.
(2) The relevant year for which bonus is claimed
is a self sufficient unit and the appropriate accounts
have to be made on the notional basis in respect of
the said year. 'Once the bonus year is taken as a
Unit self sufficient by itself the decision of the Labour
Tribunal in regard to the refund of excess profits
tax and the adjustment of the previous years depreciation and losses against the bonus year's profit must
be treated as logical and sound.'
(3) The ascertainment of depreciation is according to the Incometax Act and what is allowed as a
prior charge is the annual notional normal depreciation and not the actual depreciation which is in fact
allowed. The formula of the Full Bench in the U.P.
Electricity case as explained and clarified in Surat
Electricity Co. Ltd. Staff Union v. Surat Electricity
Co. Ltd., (1) was approved in the Ahmedabad Miscellaneous Industrial Workers Union case and in
the case in Hamdard Dawakhana Wakf v. Its Workmen & Ors. (2) Apart from the notional normal depreciation the depreciation allowable under Incometax Act for multiple shift is alsg allowable.
(I) [1957] (2) L..LJ. 648.
(2) [1962] (2) L.L.J. 772.
252
SUPREME COURT REPORTS
[1972] 1 s.c.R.
( 4) In calculating the Incometax for deduction as
prior charge it is not the notional normal depreciation
alone that has to be deducted but the statutory
depreciation
namely
the
concessions
given
under the Incometax Act to the employers which
would include the depreciation for multiple shifts
if any, and thereafter the Incometax will have to be
calculated.
(5) Return on paid up capital allowable for
deduction from the gross profits is 6%. This is
generally the formula adopted by the Full Bench for
Industrial Undertakings though it has been known
to have allowed a slightly higher percentage of
return in risky undertakings like plantations.
(6) Return on working capital. This amount
is also allowed but at a lower rate. The formula as
approved by this Court is that if it is shown that the
. reserves were available and were actually used as
working capital whether the reserves utilised were
depreciation reserves or any other, a return from 2 ~~
to 4% is allowable according to the industry, taking
into consideration any special circumstances which
may justify a claim for a higher interest.
The
utilisation of the reserves obviate the necessity to
borrow from outside sources and pay higher interest
which will be to the detriment of labour as the available surplus is likely to be less on this accountWorkmen v. Hindustan Motor Ltd.(1)
(7) Rehabilitation reserve also has to be provided
for in order to keep the original capital of the business in tact because assets of an Undertaking waste
and or lost by the end of a particular period depending
on the nature of the Undertaking and its asset. The
only value of such assets at the end of the period is
the scrap value. It is therefore necessary in tlie interest of labour as well as capital to provide for depreciation of such assets yearly and also to take into
account and provide for the rise in prices after the
war. The
determination of this reserve poses
problems, but it was suggested that a reasonable
method would be first to divide the undertaking into
<I) [1968] (2) S.C.R. 311 340, 342, 344.
A
B
c
D
E
F
G
H
A
B
c
D
E
F
G
I
!a
I
BAREILLY ELEC. co. v. WORKMEN (Jaganmohan Reddy, J.) 253
blocks such as "Plant and machinery" on the one
hand and other assets like Roads, Buildings, Railway
sidings etc. on the other. Then the cost of these
separate blocks has to be ascertained and their probable future life has to be estimated. Once this estimate is made it becomes possible to anticipate
approximately the year when the Plant or machinery
would need replacement; and it is the probable
price of such replacement on a future date that ultimately decides the amount to which the employer is
entitled by way of replacement cost. The claim for
rehabilitation ·includes also the claim for replacements
and modernization. It is quite conceivable that
certain parts of machines, which constitute a block
may need rehabilitation though the block itself can
carry on for a number of years. This process of rehabilitation is a continued process and unlike repplacement, its date cannot always be fixed or anti-,
cipated. So with modernization all these three items
are included in the claim for rehabilitation. It is
therefore necessary for tribunals to exercise their discretion in admitting all available evidence to determine this difficult question. For a fuller discussion in
see: The Associated Cement Companies case at pages
966-968. The probable cost is reached by adopting
a multiplier based on the rates between the cost
price of the plant and machinery and the probable
price which may have to be paid for its rehabilitation,
replacement or modernization. The older the plant,
the higher the multiplier and hence the area of conflict
between the employer and employees is larger, the
former allowing the asset to become older to get a
higher multiplier and the latter feeling aggrieved
because of it as the provision made therefor reduces
the available surplus in the boirns year. After ascertaining the multiplier, a divisor has to be adopted
in respect of each block in order to ascertain the
annual requirement -0f the employer in that behalf
year after year. As this provision constitutes a large
amount which eats into the gross profits and reduces
the surplus the Tribunals must call for all relevant
material evidence from the employer and the
employees should be allowt<d to properly test it by
cross-examination.
'
254
SUPREME COURT REPORTS
[1972] 1 S.C.R.
The deductions specified in items (5), (6) and (7)
like those in items (3) and (4) are prior charges.
(8) In Mathura Par shad Srivastava v. Sagour Electric Supply Co (1)., at page 309 the claim for contingency reserve and development reserve which have
to be provided under the Electricity (Supply) Act was
upheld. It was observed that though these do not
constitute a prior charge they have to be taken into
consideration, to arrive at the figure of bonus after
ascertaining the available surplus. The Tribunal
cannot fix such a high figure of bonus as to leave
insufficient funds in the hands of the Company and
make it difficult to provide for these two statutory
reserves. After taking these
into consideration
the ratio of available surplus . for distribution as
bonus would depend on a number of factors and is
not susceptible to any general formula. What these
factors are were posed in the form of series of
Questions by. Gajendragadkar, J., at page 973-974
in the Associated Cement Co's case, such as what
are the wages paid, what is the extent of the gap
between the same and a living wage, has the employer set apart any gratuity fund, what is the extent
of the available surplus, what is the general financial
position of the employer, what are the dividends
paid and has the employer to meet any urgent liability
etc. The fact that the employer would be entitled to
a rebate of Incometax on the amount of bonus
paid to his workmen has also to be taken into account
and in many cases it plays a significant part in the
final distribution. It was also held that overtime payment ought not to have been taken into account as part
~f the basic wage in calculating bonus payable. This
mnovation would-make an unreasonable distinction
between workmen and workmen on the basis that
some have contributed more and the others Iess to the
earning of profits.
B
c
D
E
F
G
We now propose to examine each of the claims of;Jhe
Appellants in the light of our observations as to the formula applicable in determining its validity or otherwise. H
At the outset it may be noted that on behalf of the Appel.
(I) [1966] (2) L.L.J. 307.
BAREILLY ELEC. Cb .. v: WORKMEN (Jaganmohan Reddy, J.) 255
A lam only a solitary witness, M. K. Ghosh a Chartered
Accountant of the Company who on his own admission
had joined the Company six months prior to his giving
evidence was produced. Obviously this witness could
not speak about the relevant matters from his personal
8
knowledge. Apart from this infirmity the Tribunal has
characterised his eividence as contradictory, evasive and
not reliable. Innumerable statements, letters, balancesheet, profit and loss account and other documents called
for or otherwise were filed on behalf of the Appellants. It
cannot be denied that the mere filing of any of the aforec mentioned documents does not amount to proof of them
and unless these are either admitted by the Respondents
or proved they do not become evidence in the case.
D
E
On this aspect it was observed in Associated Cement
Companies case at page 956:
·
"As a general rule the amount of gross profits
thus ascertained is accepted without submitting the.
statement of the profit and loss account to close scrutiny. If however, it appears that entries have been
made deliberately and male-fide to
reduce the
amount of gross profits, it would be open to the
Tribunal to examine the question. . . . . . . .
"
The case of the Indiqn Hume
Pipe Co.,
Ltd., v. Their
Workmen (1) however seems to have given scope for the contention that the balance-sheet could be relied upon for
proving that certain amounts stated therein were available
F for use as working capital and that it showed that they were
in fact so used. In fact in that case it was conceded that
the reserves were in fact used as working capital. Bhagwatii
J., ·who delivered the Judgment of the Court, presumably
to meet the contention that the balance-sheet had not bten
G proved, observed at page 362 thus:
·'Moreover, no objection was urged in this behalf,
nor was any finding to the contrary recorded by the
Tribunal."
This qtse was considered in Khandesh Spinning & Wvg.
H
Mills Co. Ltd., v, · the Rashtriya Girni Kamgar Sangh,
Ja/gaon, (2 ) it was pointed out that the observations made:
{I) [1959] (2) L.L.J. 357.
(2) [1960] (2) S.C.R. 841,
256
\SUPRElllE COURT REPORTS
(1972] I S.C.R.
by Bhagwati J, were not intended to lay down the law that A
"the balance-sheet by itself was good evidence to prove as a
fact the actual utilisation of reserves as working capital.
Subba Rao J. (as he then was) in that case, while dealing
with the importance or rehabilitation reserve in the calculation of the available surplus pointed out that it was necesB
sary for Tribunals to weigh with great care the evidence
of both parties to ascertain every sub-item that went into
or subtracted from the item of rehabilitation. If parties
agreed, agreed figures coud be accepted. It they agreed
to a decision of affidavits, that course could be adopted.
But in the absence of agreement the procedure prescribed c
by Order XIX, Code of Civil Procedure had to be followed.
He said at page 847:
·
'"The importance of this question in the contex, 01
fixing the amount required for rehabilitation cannot
be over-estimated. The item of rehabilitation is
generally a major item that enters into the calculations for the purpose of ascertaining the surplus
and therefore, the amount of bonus. So, there would
be a tendency on the part of the employer to inflate
this figure and the employees to deflate it.
The
acc;ounts of a Company are prepared by the management. The balance-sheet and the profit, and loss
account are also prepared by the Company's officers.
The labour has no concern in it.
When so much
depends on this item, the principles of equity and
justice demand that an Industrial Court should insist
upon a clear proof of the same and also give a real
and adequate opportunity to the Labour to canvass
the correctness of the particulars furnished bv the
employer,"
D
E
F
At pages 847-850, the Indian Hume Pipe Co's case (citattion given is incorrect--the correct citation is 1959 (2) LLJ G
357) Tata Oil Mills Co. Ltd., Vs.. Its Workmen (citation
given in the report incorrect) and A nil Strach Products Ltd.
"" Ahmedabad Chemical
Workers Union, cases (1) were
referred to and discussed. It was pointed out frat Anil
Starch Products Ltd., again reinforced the view of this
Court that proper opportunity should be given
to the
H
fabour to test the correctness of the evidence given on
(I) Civil A?peal No. 684 of 1957.
BAREILLY ELEC. co. v. WORKMEN (Jaganmohan Reddy, J.) 257
A affidavit on behalf of the management in regard to the use
of the reserves as working capital.
In Pet/ad Turkey Red Dye Works Ltd., v. Dyes &
Chemical Workers Union, Pet/ad & Anr. (1)., the question
whether the balance-sheet can be taken as proof of claim
B as to a portion of the reserve that has been used as working
capital was again considered_. The Khandesh Spinning &
& Wvg. Mills case as well as the Management of Trichinopoly Mills Ltd. v. National Cotton Textile Mills Workers
Union,(2) were referred to with approval.